One of the key benefits of buying a car with cash is you have complete ownership over that vehicle. Naturally, cash purchases are much easier when buying an inexpensive car from Craigslist or Marketplace, but consumers looking at new or lightly used models often don’t have tens of thousands of dollars at their disposal. Therefore, they need to take out a loan. Despite what some “financial gurus” would have you believe, borrowing money to pay for a car is not a bad thing, but it can put you in a difficult financial situation if you aren’t careful. Far too many buyers have found themselves underwater on their car loans — especially recently on EVs that have depreciated like rocks. Here is what that means and some ways to manage it.
[Writer’s Note: “Hello friends and fellow enthusiasts! Many of you remember me from “other websites” as the guy who gives practical car-buying advice. I’m happy to be helping my pals here at The Autopian as a contributor. My goal is to have a regular column where you ask me car buying conundrums/questions and I answer them. Send me your messages with the subject – “Autopian Car Buying” to Tom@AutomatchConsulting.com !]
Being underwater on a car loan means that your loan balance is greater than the market value of your vehicle. This is also known as having “negative equity.” For example, let’s say someone purchased a Nissan Rogue with an MSRP of $32,360. After their local sales tax and DMV fees were factored in, they had a total purchase price of $35,500. They financed this vehicle for 72 months at an interest rate of seven percent and didn’t put any money down, resulting in a payment of $605 per month. A year goes by, and this person decides they want to upgrade to a bigger car. Their current loan balance sits at $30,565, but their trade is valued at only $25,500. That puts them about $5,000 underwater.
Those who bought electric cars are facing an even more dire situation due to the accelerated nature of EV depreciation. I’ve spoken with folks who want to trade in their EV only to find out that the delta between the market value and the loan balance is upwards of $10,000 or more. If you find yourself in a situation where you are underwater, here are some options.
Hold On To What You Have
For most people, this is the best option. Being underwater only really matters if you are trying to sell or trade your car. The longer you keep what you are currently driving, the more usable value you can extract from it, and eventually, you will reach a point where there is an equilibrium between the market value and loan balance. Buyers should look honestly at their situation and determine if they really need to get another car or just want another car.
Perhaps your current ride is becoming an unreliable nightmare, or you have a growing family and can’t fit the kiddos into something small. If you determine that it’s critical that you need to move into something else, choose your next move carefully.
Bring Some Cash To The Table
If financing another car is what you need to do, bring cash to cover the gap between the value and the loan balance. While this is the most obvious solution, it is often the most ignored. Using the Nissan Rogue example above, if that buyer wanted to finance another car they should put at least $5,000 down (ideally more) so that the next loan is only for the replacement car.
Unfortunately, in today’s economic climate, too many people simply don’t have thousands of dollars in extra savings. If that’s the case, you may need to get creative
Try Leasing
A possible way to break the underwater cycle is to roll your negative equity over into a lease. Since leases often offer payments substantially lower than finance programs, and end at a fixed term, you can use the lease to “break the cycle” of the underwater situation.
Here is how this could play out in the case of the custom with the Nissan Rogue with $5,000 in negative equity. If this person was looking for something bigger with three rows, they could explore the Hyundai Santa Fe with a current lease special of $329 per month for 36 months with $3,999 due at signing (before tax). As I mentioned above, this person likely doesn’t have several grand to bring to the table to neutralize some or all of the negative equity, which means they need to roll both the $3,999 down payment and the $5,000 in negative equity into the lease. This would increase the base payment by about $250 and they would be looking at a total payment of about $580 per month (before tax). This is within the ballpark of their original loan of $605 per month. While they will not have any equity in the Santa Fe at the conclusion of the lease, they would be able to start fresh.
This is an area where leasing an electric vehicle can be extra beneficial since the lease programs offer super low payments compared to the sticker price, and the massive rebates and discounts can absorb most or all of the negative equity. However, due to mileage restrictions and other factors, leases don’t work for everyone. In that case, there is one more option.
Roll It Over Into Another Loan
If using cash to neutralize the negative equity isn’t available, and a lease won’t work, the absolute last resort is to take a loan out on another car and roll the negative equity over into that loan. Let me be clear, this doesn’t actually solve the problem of having negative equity and will often compound the underwater situation. All this solution does is allow the buyer to change vehicles, and they will likely have a higher payment.
Going back to our example of the Nissan Rogue with $5,000 in negative equity, if this person were to buy (instead of lease) that Hyundai Santa Fe SE with an MSRP of $35,775, maybe they will qualify for the 2.99 APR special for up to 72 months. Then they would be financing a total of $40,775 (before tax and fees) for a payment of $619 per month. That doesn’t seem too bad compared to the original payment on the Rogue of $605, but if this buyer’s credit score doesn’t qualify them for the low rate, and they are back at that seven percent interest rate, the payment jumps to $695 per month.
If you must rollover your negative equity into another loan, take the shortest loan term possible and shop around to find the lowest interest rates you qualify for. Also, plan on keeping this car for as long as you can, ideally well past the point at which it is paid off.
How To Avoid Being Underwater
Having negative equity is often a situation where an ounce of prevention is worth a pound of cure. There are a few key ways to avoid being underwater. First, use a sizable down payment. The more money you can bring to the table, the lower your principal balance and therefore the less chance of you being underwater because the value of the car will be greater than the loan balance. Second, choose models that retain their value. Brands like Honda and Toyota have narrow depreciation curves and retain value. Therefore, these models are likely to keep you in a positive or neutral equity situation. Third, don’t stretch your loan too far. For most people, the sweet spot for getting a desirable model with reasonable monthly payments is a 60-month term. With a hefty down payment, you can stretch as far as 72 months, but if the only way to “afford” your target car is to take out an 84 or 96-month loan, I would suggest looking at something cheaper to avoid the danger zone of negative equity.
Top graphic images: Nissan; depositphotos.com
Wow, Autopian just keeps getting better! Welcome Tom.
I know a lot of people just have to have a “new” car, but financing a loan with interest to acquire an asset that only depreciates is… not good. In the end, a $2,000 beater that doesn’t break down is functionally just as good as a brand-new car. Some beaters (ahem, GMs with the 3800, anything Toyota) will start and run every day, almost without fail. Some brand-new cars (ahem, Ford, Tesla) can’t make it past a week without things going cattywampus all over the place.
Plenty of people on this site have been bitten by a seemingly good deal, and we generally know what to look for, so what hope does your average car buyer have? Even getting a beater inspected isn’t a guarantee it won’t break down, it’s always going to be a dice roll. And also idk where you live but I don’t see $2,000 around me that could remotely be considered a good purchase if you’re not willing to put in work.
Well, for the average buyer a 2K beater isn’t the right choice. But at the 5-7K level, there are good cars (again, buy the right brand) to be found.
And many people can scrape together 5-7K in cash, especially with a tax refund.
That’s the issue, many, many people can’t scrape together 5-7k in cash, so they go wherever they can get zero down/trade-in only financing, so they just dig a little deeper and worry about it later.
Woot! Tom McParland on The Autopian!
Financial literacy is a skill younger me could have done better at.
That, and I’d like to slap my younger self for failing to recognize that a Honda Element was an ideal vehicular choice at the time I was looking at one.
Re: Honda Elements
You and me both buddy
I keep telling my wife that we should get an element now.
What’s the meaning of “I need a larger car” anyway? Many many families around the world have small cars – Just learn to bring less stuff with you or rent a different vehicle for the handful of times a year you absolutely need one. And don’t use the “we’re planning on having more kids” excuse – – because if you’re underwater on a car, you’re also not in a position to be paying another quarter million dollars over 20 years to raise and educate another kid.
A new car is not an investment. It’s a tool to serve a purpose.
If the car is still useful – it does not matter what it’s value is.
Pay it off. Maintain it. Drive it till the wheels fall off.
I support some of what you are saying in that many people with 1-2 kids “Need” three rows of seats and some people “Need” a giant pick up truck when a utility trailer would work perfectly.
Cars are tools and I do not look at them as appreciating investments.
Welcome Tom, now we are complete. I literally did a double take and ran to the comments when I saw the author, I missed the car recommendations
“Roll It Over Into Another Loan”
In my view, if someone has to do that, then they should also be looking to replace their vehicle with something that has the lowest total cost of ownership.
So that means replacing whatever truck or suv you’ve convinced yourself you “need” and replace it with something like a Prius or Corolla hybrid.
For sure
Except no lender will let you roll over $10K of debt onto a $30K car. I imagine the only way to do it is to buy something unpopular and expensive, like a Mercedes EQE or an Infiniti QX80 or something.
For a situation like that, my response would be “sometimes in life, the best deal to make is the deal you DON’T make”.
And that would be followed with “keep your current car at least until the loan is paid off”
Welcome Tom!
I’m glad you’re here. You were one of the very few things from the ‘old lighting site’ that I missed here.
I contacted you about a year ago about purchasing a manual Toyota Supra and you honestly told me you would not able to help much, which I appreciated. Just sharing with others here that you are a standup person. (I did wait it out and eventually got a Supra that I’m happy with.)
Glad you got your Supra!
Tom, excellent to see you here adding a bit of stable advice to the blend that provides the majority of my daily automotive entertainment.
Someone has to keep these folks in line…I can’t have everyone buying Bentleys for a price of a Camry.
Only 1 article and already a COTD lol
If possible, do not be a young automotive enthusiast with good, but not great income who gets bored with their car easily and trades in often.
Jesus, if I could just go back in time and talk to my younger self…
Not only would I still probably have that ‘91 CRX Si but would have been able to shed so much unneeded negative equity over the years.
I think if you love cars of all shapes and sizes, if you aren’t very good at making repairs or don’t have time for maintenance, the endless cycle of trading in with negative equity is just a right of passage many of us go through.
No decision I’ve ever made about a car is a sound financial decision but man were those early years tougher on my checking account than they needed to be.
It’s a hard balance being addicted to vehicles and keeping you bank account sound
With what those CRX Si’s go for, you’d be doing very well. They’re now out of my league.
Welcome Tom! You’ll love it over here!
Been meaning to come around for awhile
Great article Tom. I recently got rid of a 2024 Subaru Crosstrek that I just hated. Luckily because Subarus hold their value, I was only $4K underwater. I rolled it into a lease on a Mazda3 and was able to pay about $2500 to cover the gap and the dealer rolled the rest into the lease. It is a win-win for me as I love the Mazda and my bi weekly payment is actually lower.
Sometimes that’s the best play and at the end of the lease you have a fresh start
Welcome Tom! You’re just about the only contributor on the old site that I miss reading.
Another problem with being underwater on a car loan is that, in most cases, insurance will only pay market value if it’s totalled. Gap insurance can be a good idea if you’re in this situation.
Happy to be here!
That’s a problem when you pay cash…no gap insurance…you’re just out $$$.
I’ve never been underwater on a car, but I just had a coworker talking about trading in a vehicle BECAUSE she’s underwater and doesn’t want to be. I tried to convince her to hang onto it, but she’s heard about a good interest rate (that I suspect she won’t be able to get) and thinks that’s going to get her into a state of positive equity (it won’t).
If she hasn’t made the mistake before the next time I see her, I’ll have to send her this. I suspect she won’t listen to the advice of hanging onto the car, but at least she could be a little better informed.
Often, my articles aren’t for smart readers here that know the ins and outs of stuff, but for the “average” folks that may come across it or readers like yourself that share it with friends.
It’s definitely a thing I have always appreciated about your articles where I have found them–they are written for the audience who need them. You don’t assume people know all about buying cars, but you also don’t talk down to the reader.
Good advice if someone *needs* to buy an expensive vehicle. Better yet to buy a used car with cash, and keep doing that if possible. It’s tragic how many people were upside down on their loans and yet didn’t sign up for gap insurance and then were shocked when their vehicle got totaled and still had to pay (or roll the debt onwards). Things you learn. Also, the insurance payout is never as high as you’d want it to be.
This is true and is the insurance risk is the other big danger of being underwater.
In my view, if someone needs to rely on gap insurance, then they’ve bought a vehicle too expensive for their wallet.
Or they bought an EV that depreciated very quickly. Gap insurance is just about as reasonable as any other insurance. You may be able to absorb the cost of a problem, but maybe the hedge against it is more palatable.
Egg-zackly!
Sometimes you may get better assistance from your auto insurance on getting car replacement assistance (USAA), Payoff Protector from State Farm (only if you use State Farm Bank), Guaranteed Asset Protection (Allstate). They normally will cover for up to 20% over the current value of the vehicle. This would not help on a big delta between the current value and the loan, but may be worth looking at if you are paying cash or a heavy down payment.
what’s the benefit of putting money down initially vs bring cash to cover the negative equity (other than lowering monthly payments). It seems you need to cover the $5k either way. I’d rather hold that $5k as long as possible.
You’re right, but there is something to be said for lowering the monthly payments, especially if you’re the sort of person who has been rolling deficits into new loans. I think this article is targeted at the person who thinks in monthly budget and may not be able to trust themselves to hold onto that money.
It also depends on interest rates. If you’re paying 7% interest, throw cash at it. If you’re on a 0% interest deal, hang onto the money. Any time you can earn more interest than you’re paying, pay as little as possible until that changes, as long as you can trust yourself not to just spend it elsewhere.
In theory, that’s all fine and good.
In practice – you never know what life will bring. If the poop hits the rotator, maybe you no longer have that $5K sitting there to cover the difference? And you are paying interest on that $5K if you don’t put the money down. In rare instances, you can make money on the difference, but that is the exception. I bought my mother a KIA Soul three years ago when KIA was doing 2.99% interest and FDIC-insured CDs were paying 5.25%. I still put $10K down on the thing so I wouldn’t have to worry about it. But I didn’t pay cash for it because of the difference in rates. It’s a balancing act, and you just have to do what you are comfortable doing.
I would prioritize a shorter loan term over a big down payment too. I refuse to owe money on a car out of warranty as a general rule, and have paid off every new car I have bought long before even THAT. I broke that rule when I bought my ’14 Mercedes, but that was due to another of those “you never know what life will bring” moments. I had to buy a car to replace one drowned in a hurricane. Said hurricane did $25K in damage to my house that I didn’t want to dick around waiting for insurance to pay out. So I took a note on half the value of the Mercedes so I could conserve the cash to fix the house, and paid off the Mercedes as soon as I could – 18 mo or so. The liquidity was worth the few hundred bucks in interest that cost me. In hindsight, probably should have just kept the note given what interest rates have done, but I really prefer not paying interest.
But having been burned in my youth, I will NEVER be upside-down on a car note again, ever, for any reason. It’s a lesson you only want to learn once, if at all.
Good to see your here, Tom. Always enjoyed reading your advice at the old site.
Glad to be blogging with these maniacs again 😀
Welcome (back), Tom! Great to see you again.
Nice to see you here Tom! That other site just seems to be more of a hot mess by the day.
Be very careful about leasing, as you can end up even more screwed if your needs change or you need to get out of the car for some reason. You will be just as underwater if not more so.
I learned a valuable lesson about all of this when young and dumb. I leased my first ever brand-new car. Golf TDI. LOVED it. Then I lost my job 2yrs into a 4yr lease witha big mortgage (relative to my income) and no savings. That car payment had to GO! And I very quickly found out I was $5K+ underwater on that lease. Thankfully, the First Bank of the Old Man bailed my dumb ass out, paying off the lease so I could sell the car. But NOTHING sucks harder than making payments on a car you no longer own, as I paid him back every penny, with interest, once I had a job again.
So today, no way, no how, will I buy a car without a down payment sufficient that if the poop hits the rotator I can wander on over to CarMax and make the problem go away forthwith. Even though these days 25 years on it would not be a problem to just write a check for the difference, I simply never, ever want to be in that situation again.
Yeah leasing can be a risk as well, but I have seen opportunities, especially in the EV market for folks that were underwater on their cars to roll into an EV lease and maintain low payments, then at the end of the lease term, they get a fresh start.
That’s all fine and good if you can make it to the end of the lease term. But life happens.
“Be very careful about leasing, as you can end up even more screwed if your needs change or you need to get out of the car for some reason. You will be just as underwater if not more so.”
Leasing is the the creation of Satan. And I know this because Satan himself confirmed it!
https://opposite-lock.com/post/575338
ROFL!
In most cases, I completely agree. Leasing is usually a terrible deal masquerading as a good one.
Double post.
So happy to see you here, Tom!
Happy to be here!
Welcome Tom! Glad to see you here.
Happy to be here!
David: “Tom, we’re putting the band back together.
Torch: “We’re on a mission from God.”
We’re 106 miles to Chicago. We’ve got a full tank of gas, half a pack of cigarettes, it’s dark and we’re wearing sunglasses…. Hit it
Remember, creditors aren’t checking to see if you can afford whatever you are taking a loan for. They are only checking if they can make money off the loan!
That is highly dependent on your credit rating. I have never had to confirm income for a car loan. But my credit rating is platinum plated and diamond encrusted. Family members who are not so responsible have been put through financial proctological exams to get a note, and in one case even subest of subprime lenders wouldn’t touch them (and rightly so).
I assume it is also going to vary wildly by whatever the economy is doing. I suspect that right now it is a whole bunch harder to get a car loan than it has been since 2008/2009.
I think there is a large set of people who think of they pass the credit check and income requirements that means they can afford what they are buying. The reality is the creditors know that with a high enough interest rate they will come out ahead in most cases even if the loan is underwater.
Sure, but that doesn’t mean anybody can just walk in and get a loan for anything. it’s lots easier than buying a house, but it’s not THAT easy unless you have top-tier credit. And chances are, if you have that good a credit rating you are actually financially responsible and know what you can and can’t comfortably afford. Or at least you will make other sacrifices to be able to make that payment. I certainly know people who are “car poor”.
I have had to explain that to my partner who wants to buy a house we can’t afford. When the bank said they’d finance with a payment of $X, she took that as meaning we could afford the house. I had to explain to her that we could not afford to more than double our housing costs, even if we tightened our belts on other things, especially if we wanted to set aside money for maintenance and improvements.
Unfortunately, there are plenty of people like her who don’t have someone else involved who can point out the impossibility of making the payments.
We do not have a problem buying new cars. We also tend to keep them LONG after they are paid off, often to the point they are ready for the junkyard. So our problem is often we do not have high value used cars to sell/trade towards the next car. (My jeep has been paid off for 6 years)
I just effectively keep making payments to myself when I don’t have a car loan. But I put savings into the bank “off the top” anyway.
Thankfully, these days the automakers are saving me from myself by no longer making anything I want to buy. And I seem to have settled on a bunch of paid-for cars that have kept my eye from wandering too much even in the used selections.
I am not that rich. No car payment on mine helps with the car payments on my wife’s and saving for things like tree removal or repairs on my jeep because it is a jeep.
Just keep reminding yourself how much cheaper repairs are than payments. It really helps with the sting of them. And do what you can to keep it from rusting – to me that is the only legit killer of vehicles. But I know that is tough with Jeeps.
I had almost $7000/repairs last week luckily after warranty it was only $850.
A $50K car is well over $1000+/mo to pay off in a reasonable amount of time. More than $12K/yr. $7K in repairs are still cheaper than that. Math is hard, I guess.
Lucky you winning the warranty lottery! I have never had a single car where I would not have lost 100% of an extended warranty.
Well, you know math isn’t hard, but paying for things in an expensive economy is when you aren’t wealthy. No insults or smugness needed please.
How is paying for a few grand in repairs harder than paying nearly $50K for the average a new car? And yet that is actually the calculous that most people make. So evidently, math is quite hard.
wow this is getting very jalopnik.
I call it as I see it. Reality is that repairs are an excuse, not a reason. people just want a new car. Which I am perfectly fine with if they are honest about it. But don’t try to tell me it makes financial sense, because it rarely does.
It’s no different than “needing” a pickup truck. Very few people NEED a pickup. About a million a year just WANT one.
This. When my wife and I were first married and I got my first job out of college we were stupid enough to go out and buy a brand new truck because we could barely cover the monthly payment. 2 years later she went back to school and was driving 100 miles per day and we couldn’t cover the payment AND the gas. The truck had to go so we traded it on a Jetta TDI and went from 15 mpg to 50 mpg.
We kept that car for 10 years / 250K miles. When the 5 year loan was paid off we started saving the payment. After 5 years of saving payments we had enough to buy a nice 3 year old car off lease and didn’t need a loan.
That was the last time we NEEDED a car loan. Since then we have taken out a loan when the terms were good and we were making money by keeping the money in the bank. However, it push came to shove we had the money to pay off note.
That’s the way to do it. And I am sure that in that 250K you had things you needed to fix, but it was always cheaper to do that than to buy a new one.
To me, there are only three reasons to get rid of a car – rust, your needs radically changing, or boredom. I freely admit boredom is the #1 with a bullet reason for me.
We replaced that 2003 TDI with a Prius and then added another Prius – both purchased used off-lease vehicles.
We intended to drive them for 250K miles as well but boredom struck and they were sold at 10 years and 13 years. Nothing wrong with them – we were just tired of driving a Prius.
The 2005 Prius was replaced with a Spark EV on a $99 per month lease.
That was by far the cheapest car I have ever driven on a TCO basis and was fun with 400 lb-ft of torque stuffed into a tiny chassis. It was a near perfect commuter – I should have kept it at the end of the lease but at that time my wife was commuting to work on a bicycle.
The 2009 Prius was replaced with another TDI wagon – a 2014 this time. It was a dieselgate return and was a lemon. I sold it to Carvana in 2022 for $4,000 more than I paid in 2018
Welcome to Autopian Been reading your stuff at the old site for years – very informative and entertaining too.
Thanks!
Happy to have you here, Tom!
Always a good time with these folks